I should be shot for asking this question, but i am going to ask it anyway. what is the difference between fair market value (fmv) and after repair value (arv) and how do you find either? It is hard to work numbers if you are unsure about the FMV. If i want to get a house at .50 on the $1, or whatever, how do i know if i am getting that right.
ps. does it have anything to do with the asking price?
Fair Market Value is the dollar amount a house should sell for in its current condition.
ARV (After Repair Value) is the dollar amount a house should sell for after it is fixed up.
If a house doesn’t need any repair, then its FMV and ARV are the same.
Asking price has absolutely nothing to do with either FMV or ARV.
Good Luck,
Mike
Mike is absolutely right. I give little credence to seller’s asking price. My main concern is FMV or ARV and repair costs.
The numbers tell the story if it’s a good deal or not.
[i]DEFINITION OF MARKET VALUE: The most probable price which a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and the seller, each acting prudently, knowledeably and assuming the price is not affected by undue stimulus. Implicit in this definition is the consummation of a sale as of a specified date and the passing of title from seller to buyer under conditions whereby; (1) buyer and seller are typically motivated; (2) both parties are well informed or well advised, and each acting in what he considers his own best interest; (3) a reasonable time is allowed for exposure in the open market; (4) payment is made in terms of cash in U.S. dollars or in terms of financial arrangements comparable thereto, and; (5) the represents the normal consideration for the property sold unaffected by special or creative financing or sales concessions* granted by anyone associated with the sale.
Regarding ARV (After Repair Value): Be careful here. Rarely does cost equal value. Cost to repair is often greater than after repaired value. It’s dependent on the market place in any given region. Example: installing a pool in the Pacific Northwest will cost about 3 times as much as the market will bear–due to the weather conditions pools are not highly desireable in the PNW (while the opposite probably holds true in So.Cal).
Unless you understand and can perform paired sales analysis…I’d recommend hiring the services of a pro. Otherwise you just might get your proverbial head handed to you (financially speaking).
It’s easy to make money while markets are briskly appreciating, however, when markets slow…that’s when the pro’s are separated from the novices.
-Infowell
lets say i am lookin at a 3br 1.5ba brick colonial w/fp, pf basement, 1car for 65k. i get comps from my realtor who of sold houses in the neighborhood, 6-7 blocks or so. the comps look like this for all 3br, 1.5 ba brick colonials w/fp, pf or f basement, 2car:
p1 sold for 139k
p2 sold for 105k
p3 sold for 148k
p4 sold for 150k
p5 sold for 82k
would it be safe for me to assume from comps that the fmv of this property is around 130k and getting it for 65k is a steal (about $.50 on the $1) or should i look at ARV which would probably be about the same, however i don’t think the house has any major repairs to be done, just minor fix-up and up-dates. i guess what i am asking is did i find a gold mine. will i be able to flip it and make a nice profit?
only1minya,
No, it is not safe to assume that the FMV is about 130K. This is exactly why I always say that you must KNOW YOUR MARKET. Why did some of these houses sell high and some low? Which is correct? Are prices increasing or decreasing? Maybe the $82K comp is the most recent and the others occurred before prices began to fall. Which of the comps is your proposed purchase most like?
The point is that it is dangerous to guess when determining value. I don’t trust anyone but myself to determine the value. I have looked extensively at the area and I KNOW what a house should sell for based on it’s individual characteristics. I don’t think the importance of this concept can be overstated!
Good Luck,
Mike
okay. i saw the property and it has about 20k in work that needs to be done. the area is a pretty solid area with mostly homeowners who take care of their property. this house however, is still a good buy. im sure of it. if you buy it at 65k and put 20k in work, then the arv would be about 85k which is undervalued i think, but that is why i am asking? this property has excellent comps. it has sat on the market for awhile, but mostly because there is no for sale sign in the yard. no one knows its for sale.
Are you going to rely on peoples opinions from an internet message board to make your decision?
Your interpretation of ARV are incorrect. The ARV would be the value you think you could sell the property for. You are calculating the cost to purchase + repairs, that is not the ARV.
This is what I have been taught about comps:
Take the lowest one which was $82K and find out when it was sold and what is different from the others
Take the highest one and determine when it was sold. Drive by and look at all of them so you can see for yourself if there are any differences.
Remember that all of the houses you discussed in your comps were 2 car garages and yours is a 1 car garage. You will need to adjust for that.
I like to be a little conservation when trying to make an evaluation of my comps because I don;t want to overestimate, make a decision from that high number and then not make what I thought I could.
Example: $120 ARV
65% of ARV = $78K (Most you should pay using the 65% formula)
$65K Selling Price
25K Repairs (always add a little more for the unexpected)
2K Holding Cost for approximately 3 months
5K Closing Cost (if you sell) and.or Real Estate Commission
$97K Bottom line amount you will pay for the house. I know I left something out
The repair cost seems to eat up a lot of the profit. But it looks like you could possible make about $20K if you rehab, but I don’t see a wholesale deal in this one.
Of course I am new, but I like showing some of what I have learned so far because it helps me in analyzing deals.
“Of course I am new, but I like showing some of what I have learned so far because it helps me in analyzing deals.”
I highlighted that not to offend anyone, but rather, to make a point.
How much does one adjust for a one car garage compared to a two car? Is it cost? Is it possible that buyers who need a two car garage won’t even look @ a one car garage…what type of affect does that have in the marketplace?
What’s a paired sales analysis? How many paired sales would it take to perform the analysis? Would one do? (possible anomaly)…two?..three?
What’s effective age & how much do you adjust per year for it? Would you base it on the construction cost new to replace the improvements? If so…how much would you adjust…expressed as a percentage?
What about condition of the improvements @ the time of sale. You could drive the comps now, but have there been any repairs made in the interim? What was the condition of the inside @ the time of sale, and does that have any bearing on value?
What about location adjustments? How do you make those? (power lines, corner lots, busy streets, cul-de-sacs, greenbelts…etc…). How about site size adjustments? Are there any view amenities?
Were there any seller concessions? How much? What kind? What type of financing was utilized, and does that matter?
How about time adjustments? (date of sale) Are properties appreciating…depreciating…flat? Do you just guess? (Ron Insana on MSNBC says @#!&…NOOOOoooo! Don’t get your information from the TV or newspaper or @ the watercooler).
How about design & appeal. Where there architectural differences between the comparables & does that have an affect on value? Are there differences in quality of construction materials? Have any of the comps (or subject) ever been updated? If so…what were the improvements?
How about room count adjustments? How do you make those? Where’s the number come from (an Uncle who has an appraisal on his house)?
How about obsolescence…aka depreciation (physical, functional & external)? Do you know what that is & how to make adjustments for it.
What about amenities like heat sources (baseboard vs. FA Gas)? Does that have any impact in the marketplace? Energy efficient items? Porches, patios, decks? Fences (fully, partially, rear only), pools, hot-tubs, other amenities?
While one or more of these items may not have an impact on market value when considered alone…together they could significantly affect market value.
Again…even trainee appraisers must be licensed (in many states). Then they have to complete a state specified number of course work, put in a state specified number of hours actually appraising state specified types of properties over (typically) a two year period…before they can even sit for the exam. I’ve known people to fail the exam even after all that.
Good luck,
-Infowell
heres the deal, i went back to the property with my contractor who estimated about 50K in renovations. this property is on an irregular corner lot, but it is in an area that has a lot of extremely expensive homes within 2mile radius. the neighborhood values are appreciating. actually this house is in the worst condition of all the other houses in that area that have sold. because the comps in that area are so good (which is rare for Detroit to have almost an entire zip code with appreciating home values) there have been lots of interest in the property. the equity is there. but not at the 65% scale. i personally would not pay 78k for it (65% of 120K).